Iraq on oil collision course with Saudi Arabia

Having overtaken Iran as OPEC's second biggest producer, a rejuvenated Iraq is beginning to worry Riyadh.
Photo: AFP

by
Amena Bakr | Peg Mackey

A new rivalry at the top of the OPEC oil producer group has emerged, pitting up-and-coming Iraq against undisputed cartel heavyweight Saudi Arabia.

Having overtaken Iran as OPEC's second biggest producer, a rejuvenated Iraq is beginning to worry Riyadh.

At Wednesday's meeting of the Organisation of the Petroleum Exporting Countries, the opening salvos were fired in the struggle over who takes responsibility for cutting output if oil prices, now at a comfortable $US109 a barrel, start falling.

OPEC agreed to keep its 30-million barrel-a-day output target and meet next on May 31. But many market observers think supply restrictions will be needed sooner rather than later if producers want to prevent prices tumbling from slow global growth and swelling inventories.

After 20 years of war, sanctions and civil strife that left its oil industry in disarray, Iraq is no mood to consider curtailing output just as it starts to take off.

"Iraq will never cut production," said Iraq's OPEC Governor, Falah Alamri. "Some countries that have increased their production in the last two years – they should do so. This is a sovereign issue, not an OPEC issue."

That was a clear reference to Saudi Arabia, which lifted output to a 30-year high above 10 million barrels a day this northern summer to prevent oil prices ballooning after Western sanctions on Iran halved its production.

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The view from Riyadh, said delegates at the meeting, was that Iraq should contribute to the next round of OPEC supply curbs.

If Saudi pushed that line there would be "dark days ahead" warned a senior Iraqi official, saying Baghdad would not even consider output restraints until 2014.

Raad Alkadiri of Washington consultancy PFC Energy said: "Every additional barrel that Iraq produces reinforces its confidence and its expectations that higher production is achievable – and it will negotiate on that basis.

"Now OPEC is dealing with a much more confident Iraq and Baghdad is looking at regional politics and is less willing to compromise."

Neil Atkinson, director of energy research at Datamonitor, said: "Iraq is impervious to arguments. It says that it was subject to sanctions for so long that it has a free pass to rebuild its economy."

Output from OPEC is already down sharply from the highs of the summer, when the Saudi surge took the 12-member group to nearly 32 million barrels per day. Production in November was down to 30.8 million and Saudi eased to 9.5 million.

But OPEC may need to ease further to balance the market in the first half of next year when, with demand depressed by a stagnant economy, its own forecasts indicate the requirement for OPEC crude will come in at only 29.25 million barrels per day.

Algerian Energy Minister Youcef Yousfi said: "We're concerned by the drop in demand and the high level of stocks."

Atkinson said: "There is rising oil from places like the United States and Iraqi output is rising quite sharply. There's a risk that we see a sharp drop in price next year."

Output began to rise strongly in 2010 after Baghdad secured service contracts with companies such as BP, Eni, Exxon Mobil and Royal Dutch Shell.

Flows have now reached 3.4 million barrels per day – up nearly a million barrels per day from when companies got down to work three years ago.

Luaibi said output next year was expected to average 3.7 million barrels per day – just shy of a record high of 3.8 million, hit in 1979 with exports running at 2.9 million barrels per day, including 250,000 barrels per day contributed by the semi-autonomous northern Kurdistan Regional Government (KRG). That may be ambitious, but 3.5-3.6 million appears possible.

The changing shape of Middle East politics after the US-led overthrow of
Saddam Hussein
in 2003 and the 2011 Arab Spring plays into OPEC dynamics.

That was illustrated at Wednesday's meeting by a quarrel over the appointment of OPEC's next secretary-general, the group's public face and head of its Vienna headquarters.

Iran dropped its nomination to back Iraq's candidate against Saudi Arabia. But Riyadh and Baghdad would not give way and Libya's Abdullah al-Badri was reappointed for another year.

FRACKING HEAT ON OPEC

Adding to the heat is the dramatic rise in oil output from the US, spurred by hydraulic fracturing, or fracking, of shale reserves.

The US Energy Information Administration said on Tuesday that US output would increase by 760,000 barrels per day this year, the fastest pace since commercial oil production began in 1859.

Nigerian Oil Minister Diezani Alison-Madueke said: "It is obviously something we are looking at very carefully because it is increasing and we expect it will have a major impact on OPEC producing countries."

After years outside OPEC's quota system because of low output, Iraq was brought into the fold a year ago when OPEC set its 30 million barrels per day target for all 12 producers. But unlike previous OPEC deals, no individual quotas were assigned.

That suited Saudi Arabia, leaving it free this year to balance the markets by using its spare capacity as it saw fit.

But in the event of a build in inventories that hits prices, OPEC may need to restore quotas if it is to enforce a credible production cut.

That is likely to prove very difficult, not just because of Iraq, but because Iran is unlikely to accept a quota anywhere near its sanctions-constrained production. Venezuela, too, could resist a lower quota after disputing independent estimates of its output for years.

Datamonitor's Atkinson said: "Quotas would become a big issue if we see a price drop and then everyone would have to come to the table. That would cause enormous problems for Iran and Venezuela."

OPEC can only hope that a difficult decision is postponed by a continued stand-off between Western powers and Iran over Iran's nuclear programme, and the threat of Israeli military action, keeping oil prices high.

That could mean a repeat of this year, with oil prices supported next year for fear of an attack on Iran, even if demand is poor and market fundamentals weaken.

Oil broker PVM said: "Lady luck has been a huge help for OPEC because the macro numbers do not add up to 2012 being a successful year. She has come in the form of geopolitical tensions and supply uncertainties which have kept speculative interest in oil lively and stimulated stock building."